In today’s social media-driven world, financial influencers, or finfluencers, are shaping how people approach investing and wealth creation. While some offer genuine insights, many operate with questionable motives, putting their followers at significant risk. From advice rooted in faked expertise to herd mentality and a lack of accountability, following the wrong finfluencer can lead to poor financial decisions.
This blog explores the critical risks of relying on such figures and highlights hard truths every investor must embrace, such as the reality that wealth-building requires personal effort, specific strategies, and patience—not quick-fix schemes.
Let us dive in.
Do read my earlier blogs, Rise of Finfluencers, Red flags (Part 1, Part 2) for better understanding of this blog.
Risks to Followers
The risks are mainly on ignorant and innocent investors. What are the risk?
Advice from Faked Expertise
- Social media makes it easy for anyone to claim expertise, and this poses a significant risk for those looking for investment guidance.
- Nowadays everyone in social media is an expert. Relying on unqualified finfluencers can result in poorly informed decisions, leading to potential financial losses.
- This can seriously harm your portfolio and hinder your wealth-building journey.
Herd Mentality
- Social media often encourages a herd mentality, where investors follow trends without conducting their own research.
- When a popular finfluencer endorses an investment, it can trigger a rush of investors eager to buy the same asset, creating price distortions and heightened volatility.
- This effect can become an echo chamber when multiple influencers start discussing the same stock, amplifying the rush.
Conflict of Interest
- Many finfluencers might have undisclosed financial stakes in the investments they promote.
- Companies could pay them to endorse specific products or assets, resulting in biased advice that may not align with the best interests of their followers.
- It’s crucial to approach such recommendations with caution—conduct your own research or consult a qualified financial advisor before making investment decisions.
Lack of a Proven Track Record
- No Historical Performance Data: Many finfluencers do not provide any verifiable historical performance data of their recommendations, making it difficult to assess the long-term reliability of their advice.
- Cherry-Picking Success Stories: They might only highlight their successful investment calls, conveniently ignoring the failed ones, which creates a biased picture of their expertise and track record.
Lack of Accountability
- Unlike licensed financial advisors, finfluencers operate without the oversight of regulatory bodies or adherence to ethical standards.
- This lack of accountability means that if their advice results in losses, followers have little recourse.
- On the other hand, licensed professionals undergo years of education and are closely monitored by regulators, ensuring they provide suitable, high-quality advice.
While licensed advisors aren’t perfect, their commitment to responsibility and accountability far surpasses that of many finfluencers, who shy away from any responsibility by including disclaimers like “Not SEBI registered” or “Stocks are for educational purposes” to distance themselves from responsibility.
Pump and Dump
Social media creates the perfect environment for pump-and-dump schemes, which work as follows:
- Finfluencers might buy a stock and then aggressively promote it on social media with an appealing story.
- This promotion artificially inflates the stock’s price.
- The finfluencers then sell their shares at a profit, leaving their followers holding devalued investments.
Lack of Risk Disclosure
- Finfluencers often focus on the rewards of investing, such as promises of quick returns or becoming wealthy, while downplaying or ignoring the risks.
- This can give followers a false sense of security, leading them to invest in high-risk assets that may not align with their true risk tolerance or understanding of the market.
Short-Term Focus
- Many finfluencers highlight short-term gains and speculative trading strategies, which might not suit long-term investors.
- As discussed in my earlier blog, their focus tends to shift frequently—from one sector to another.
- This month, they might be talking about power stocks, the next about public sector units (PSUs), followed by themes like rail or defense sectors.
Hard Truths to Embrace
When you get into the world of Social Media for financial advice, there are certain HARD TRUTHS to embrace. Only with this clarity, you can set the right expectations for yourself.
It is not Other’s Job to Make you Rich
- Ask yourself this: Why would anyone share “secrets” or “tips” on social media to make you rich?
- True secrets to wealth would not be openly available for free on social platforms.
- As a concept I once read in a book (though I don’t recall which one): If someone really discovered a genuine secret to wealth, they wouldn’t share it publicly. Instead, they would privately leverage it to build generational wealth for themselves.
- Keep this in mind—your finfluencer isn’t there to make you rich.
- To put it bluntly, many are there to make themselves rich.
Non-specific & Impersonal Advice
Everyone’s financial situation and goals are different, and therefore there is no ‘one-size-fits-all’ solution to investing. Even IF Finfluencers are genuine and their advice is of Golden standards, it does not take your personal situation into consideration. There is a good chance that it might not be appropriate for you, thereby increasing risk. You may have long term vision for our holdings while your finfluencers would have a short term focus or even speculative gains. Everyone has a difference tolerance for risk. It could be due to your income level, life goals or investing mindset. So, remember that a Finfluencer’s advice most of the times cannot be replicated for your scenario.
People can Fake in Social Media
Social Media is a dark world. It is a fancy world of lies and hidden truths. People boldly claim they had entered a particular stock at rock bottom and exited just before it started falling again. It is easy to make bold claims after events have unfolded. In the past many fake screen grab scams were unearthed. You have no means to verify their claims. It is quite possible that they don’t even hold the stock that they talk about. They are just taking some stock which is sensational or a hot pick for that moment.
There is no Quick Rich Schemes
Everybody wants to get rich and wealthy. There is absolutely nothing wrong in this. But getting rich and wealthy quick is where the real flaw lies. One really cannot get rich and wealth very soon. If there as one, then everyone around will be multi-millionaires. There are few outliers who can make such a cut. If there was real such possibility, then even Government would do the same to get rich and will be running the country without deficit!
This is a typical theme (‘get rich quick’) amongst dodgy influencers. This basically triggers our greed to get rich soon and thus follow their content. Hence it is best to avoid (or alteast think twice) any plan or scheme that promises to give you great wealth overnight.
Not all Finfluencers are the Same
It is to be noted that not every Finfluencer cheats. Everyone cannot be painted in the same brush. All is needed is the judgement to identify the right person which is not hard to do. The question that would loom is how to find the right Finfluencers? This topic shall be dealt in depth in the next blog.
Conclusion
Navigating the world of social media finance requires vigilance and a healthy dose of scepticism. By understanding the risks posed by fake finfluencers and accepting the hard truths about investing, you can make more informed choices. Remember, building wealth is a gradual process that demands dedication, thoughtful decision-making, and a reliance on credible sources. Armed with these insights, you can confidently separate genuine advice from mere hype, ensuring your financial journey stays on the right track.
Hope you found this blog useful. Do share my blogs with your friends, peers and fellow investors.
Excellent Blog.